Question Tag: Floating Charge

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  • 1 Marks

BL – May 2015 – L1 – SA – Q8 – Company Law

Identify which of the listed characteristics does not apply to a floating charge.

The following are the major characteristics of a floating charge EXCEPT, it is
A. Not attached to any particular asset or assets of the company
B. Attached to a particular asset or assets of the company
C. Ambulatory and shifting in nature
D. Equitable in nature
E. A form of company security

Answer: B

Explanation:
The correct answer is “B. Attached to a particular asset or assets of the company.” Unlike fixed charges, floating charges do not attach to specific assets of a company until crystallization. They cover a pool of assets that change over time.

  • 12 Marks

BCL – May 2019 – L1 – Q6a – Company Law

Explains the concepts of floating charge, naked debentures, and income surplus in company law.

a) Explain the following:
i) Floating charge
ii) Naked Debentures
iii) Income Surplus
(12 marks)

i) Floating Charge:

  • A floating charge is an equitable charge over the whole or a specified part of the company’s undertaking and assets, both present and future. This type of charge does not preclude the company from dealing with such assets until the security becomes enforceable. The charge crystallizes into a fixed equitable charge on the company’s assets upon certain events, such as the appointment of a receiver or manager, the company going into liquidation, or a court order.

    (4 marks)

ii) Naked Debentures:

  • Naked Debentures are unsecured debentures having no charge, either fixed or floating. This means that the debenture holders do not have any claim over specific assets of the company as security for the loan.

    (4 marks)

iii) Income Surplus:

  • Income Surplus is defined by Section 70 of the Companies Act, 1963 (Act 179) as the net assets of the company, which is the total value of the assets less liabilities and stated capital. It excludes any unrealized appreciation in the value of the company’s assets and any credit balance on the share deals account immediately before the ascertainment of the income surplus.

    (4 marks)

  • 16 Marks

BCL – May 2018 – L1 – Q6b – Types of Capital and the Financing of Companies

Define a debenture and explain when a receiver/manager is appointed.

b)
i) Define a debenture. (2 marks)

ii) State the time when a debenture holder on a floating charge will deem it necessary to apply to the court for the appointment of a receiver/manager.

(4 marks)

iii) At what time will an annual general meeting of a company limited by shares be dispensed with in any year? (2 marks)

iv) State FOUR persons who qualify to receive notices of general meetings in a company limited by shares. (8 marks)

i) Definition of a Debenture:
A debenture is a written acknowledgment of indebtedness by a company setting out the terms and conditions of the loan (section 80 (2) of ACT 179). (2 marks)

ii) Appointment of a Receiver/Manager:
A receiver/manager in that context is appointed where the security of the debenture holder on floating charge becomes enforceable and the holder of the security, pursuant to the power in that behalf in the debenture or the deed securing the same, or where the company goes into liquidation (section 87 of ACT 179).
(4 marks)

iii) Dispensing with Annual General Meeting:
Where the auditors of the company and the members of the company entitled to attend and vote at an annual general meeting agree in writing that an annual general meeting shall be dispensed with in any year (section 149 of ACT 179). (2 marks)

iv) Persons Qualified to Receive Notices of General Meetings:

  • Every member,
  • Every person on whom the ownership of a share devolves by reason of that person being a legal personal representative or a trustee in bankruptcy of a member,
  • Every director of the company,
  • Every auditor for the time being of the company.
    (4 points for 8 marks)
  • 10 Marks

BCL – Mar 2023 – L1 – Q5a – Types of Capital and the Financing of Companies

Distinguish between fixed and floating charges and explain circumstances for crystallization.

a) A company may raise a loan capital and/or long-term funds by the issue of a debenture or a series of debentures or of debenture stock in order to finance the business without increasing its share capital. Debentures may be secured by a charge or may be unsecured by any charge.

Required:
i) In THREE (3) ways, distinguish between a fixed charge and a floating charge.
(6 marks)

ii) Under what TWO (2) circumstances can a floating charge crystallize into a fixed charge?
(4 marks)

i) Differences between Fixed Charge and Floating Charge:

  • The charge that can be easily identified with a certain asset is known as a Fixed Charge. The charge that is created on assets that change periodically is a Floating Charge.
  • Fixed Charge is specific in nature, unlike Floating Charge, which is dynamic.
  • Registration of movable assets is voluntary in the case of a Fixed Charge. Conversely, when there is a Floating Charge, registration is compulsory irrespective of the asset type.
  • The Fixed Charge is a legal charge, while the Floating Charge is an equitable one.
  • Fixed Charge is given preference over Floating Charge.
  • Fixed Charge covers assets that are specific, ascertainable, and existing during the creation of the charge. On the other hand, Floating Charge covers present or future assets.
  • When the asset is covered under Fixed Charge, the company cannot deal with the asset until and unless the charge holder agrees to it. However, in the case of a Floating Charge, the company can deal with the asset until the charge is converted to a Fixed Charge.

(Any 3 points @ 2 marks each = 6 marks)

ii) Circumstances for Crystallization of a Floating Charge:

  • If a company fails to repay the loan or enters liquidation, the Floating Charge becomes crystallized or frozen into a Fixed Charge. With a Fixed Charge, the assets become fixed by the lender, so the company cannot use the assets or sell them.
  • Crystallization can also happen if a company ends operations or if the borrower and lender go to court, and the court appoints a receiver. Once crystallized, the now-fixed-rate security cannot be sold, and the lender may take possession of it.

(2 points @ 2 marks each = 4 marks)

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